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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 1-11686
CYCOMM INTERNATIONAL INC.
(Name of Small Business Issuer in Its Charter)
Wyoming 54-1779046
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1420 Springhill Road, Suite 420, McLean, Virginia 22102
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (703) 903-9548
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, without par value
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $18,991,587
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on March 31, 1999 was approximately $10,150,504
(based on the closing ale price of $0.82 per share at which the stock
was sold on March 31, 1999).
The number of shares outstanding of the issuer's class of Common Stock, no
par value, as of March 1, 1999,
12,492,928 shares
DOCUMENTS INCORPORATED BY REFERENCE
(1) Definitive Proxy Statement for 1998 Annual Meeting of Stockholders ---
Part III - Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PAGE
Part I
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Item 1. Description of Business ............................... 3
Item 2. Description of Property................................ 18
Item 3. Legal Proceedings...................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.... 18
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 19
Item 6. Management's Discussion and Analysis or Plan of Operation 20
Item 7. Financial Statements................................... 25
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................... 25
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance
with Section16(a) of the Exchange Act.............. 26
Item 10. Executive Compensation.................................. 26
Item 11. Security Ownership of Certain Beneficial Owners and Management 26
Item 12. Certain Relationships and Related Transactions.......... 26
Item 13. Exhibits and Reports on Form 8-K........................ 27
Signatures........................................................ 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
Cycomm International Inc. (hereinafter referred to as "Cycomm
International" and together with its subsidiaries, the "Company") develops,
manufactures and markets value-added rugged computer products, secure
computing products and secure telecommunications products. The Company's
rugged computer products are designed to function in adverse environments
under extreme weather, shock, moisture and vibration operating conditions.
The Company's secure computer products are designed to protect users against
the unauthorized interception of electromagnetic emissions emanating from
computer systems. The Company's secure telecommunications products are
designed to protect users against the unauthorized interception of wireless
conversation from cellular communications. The Company is currently involved
in negotiations to sell its secure computing and the Val-Comm subsidiary in
its secure telecommunications divisions. For further discussion of the
potential sales of subsidiaries, see Managements Discussion and Analysis or
Plan of Operation.
History
The Company was formed on April 30, 1986 by the amalgamation of two
Ontario corporations under the laws of Ontario. Historically, the Company
has operated under various names; however, it changed its name to Cycomm
International Inc. on February 20, 1992. The Company continued its
incorporation on October 31, 1995 from Ontario, Canada to the State of
Wyoming pursuant to the Articles of Continuance.
At its formation in 1986, the Company was involved in the manufacturing
and marketing of certain sonar activated marine buoyancy devices. In 1987,
the Company became involved in certain technologies related to
telecommunication systems. In May 1990, the Company acquired Cycomm
Corporation, an entity engaged in the development and marketing of
specialized voice privacy communications products for the secure
communications market. In November 1993, the Company acquired Val-Comm,
Inc., a company engaged in performing classified government contracting for
various communications projects.
The Company continued to develop the voice privacy and encryption
technologies through 1996. The Company made two strategic acquisitions that
allowed it to leverage existing technologies and to participate in the larger
mobile and secure computer market. Specifically, the Company acquired XL
Computing Corporation (later named Cycomm Secure Solutions Inc.) in March
1996 and XL Computing Canada Inc. (later named Cycomm Mobile Solutions Inc.)
in June 1996. Cycomm Secure Solutions is engaged in the design, manufacture
and marketing of secure computer systems. Cycomm Mobile Solutions is engaged
in the design, manufacture and marketing of rugged mobile computer systems.
In 1997, the Company recognized that the market for cellular voice
security technologies and products was still immature and would not develop
to the extent required to justify additional development. Additionally, the
Company began to experience the market for its mobile computers growing much
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faster than the market for voice privacy technologies. Accordingly, the
Company initiated a strategy which resulted in a shifting of development
resources to the mobile computer products.
The Company recorded record revenues in its mobile computing division
in 1998, however revenues in the secure computing division continued to
decrease. The secure computing division also generated substantial losses
for the year ended December 31, 1998. The secure telecommunications division
experienced immaterial losses for the year ended December 31, 1998. The
Company is currently exploring the potential sale of its secure computing
division and the Val-Comm subsidiary in its secure telecommunications
division. Management believes that the sales of these subsidiares will allow
the Company to focus its resources on the still growing mobile computing
market. For a further discussion of the potential sales of subsidiaries,
see Management's Discussion and Analysis or Plan of Operation.
The Company currently has four active wholly-owned subsidiaries as follows:
- Cycomm Mobile Solutions Inc. ("CMS"), incorporated in Quebec, Canada
on June 3, 1996.
- Cycomm Secure Solutions Inc. ("CSS"), incorporated in Delaware, on
February 26, 1996.
- Val-Comm, Inc. ("Val-Comm"), incorporated in New Mexico, on July 12,
1984.
- Cycomm Corporation ("Cycomm"), incorporated in Oregon, on January 1,
1985.
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Cycomm International Inc.
McLean, Virginia
Executive Office
(100% owned) (100% owned) (100% owned) (100% owned)
Cycomm Mobile Cycomm Secure Val-Comm, Inc. Cycomm Corporation
Solutions Inc. Solutions Inc. Albuquerque, Portland,
Montreal, Sebastian, New Mexico Oregon
Canada Florida
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Executive Office. The Company's principal executive offices are
located in McLean, Virginia. Management of all subsidiaries and the
Company's growing number of strategic relationships is conducted from this
location, along with overall administration, financial, investment, and
investor relations responsibilities.
Cycomm Mobile Solutions Inc. Located in Montreal, Canada, this
subsidiary designs, manufactures and markets ruggedized mobile computing and
communications systems primarily to the public safety and utility markets.
CMS has expanded the Company's ruggedized computer product line by adding
state, local and commercial markets to CMS's core government and military
business.
Cycomm Secure Solutions Inc. Located in Sebastian, Florida, this
subsidiary designs, tests, manufactures, and markets ruggedized, TEMPEST
specified computer and communication equipment for niche markets worldwide.
TEMPEST is the name given to the classified specification, NSTISSAM/ 1-95,
for securing computer equipment and peripherals against electromagnetic
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eavesdropping on the electromagnetic radiation emanating from all electronic
equipment. The Company is currently involved in negotiations to sell its
secure computing division. For a further discussion of the potential
sale of Cycomm Secure Solutions, see Management's Discussion and Analysis or
Plan of Operation.
Val-Comm, Inc. Located in Albuquerque, New Mexico, this subsidiary is
a communications, engineering and consulting company which provides
feasibility studies for possible development projects and custom
communications equipment developed for classified U.S. government agencies.
These activities can include prototype development but generally involve the
modification of one or more products available from unrelated companies into
an integrated communications system to meet its customers requirements.
Such work involves classified U.S. government contracts for which Val-Comm
maintains U.S. government facilities security clearances. The Company is
currently involved in negotiations to sell its Val-Comm subsidiary. For a
For further discussion of the potential sale of Val-Comm, see Management's
Discussion and Analysis or Plan of Operation.
Cycomm Corporation. Located in McLean, Virginia, this subsidiary
developed security products using both encryption and scrambling of voice and
data signals for the wireless and wireline telecommunications industry. This
subsidiary was originally located Portland, Oregon, however during 1998, the
Portland office was closed. All Cycomm Corporation activity, including the
licensing of encryption products, is done in McLean, Virginia.
Market for the Company's Products and Services
Ruggedized Computers. The Company, through its CMS subsidiary, has
developed a ruggedized laptop computer called the PCMobile that is
specifically designed for the public safety market. The Company currently
markets the PCMobile to local and state police and fire departments and other
public safety agencies as well as utility, commercial and industrial
markets. The PCMobile has been designed to withstand the specific extreme
operating conditions of the public safety market.
Ruggedized computers are computers that are built to withstand certain
environmental and operational hazards with which standard commercial
computers functioning indoors would not typically have to contend. The
ruggedization of the computer is an attempt to protect or insulate it fully
from such hazards or at least minimize their adverse impact so that the
computer can function to accomplish the specific tasks of its operating
requirements. Computers are ruggedized by the selection and mounting of
certain components, the design, configuration and fabrication of enclosures
and electronics and the application of special casings, seals and coatings.
The design and fabrication of the computer encasement and keyboard with
tougher materials, full closure and special sealants also protect it against
moisture, humidity, particles and temperature extremes.
From a strictly environmental point of view, these hazards are usually
weather-related or climatic in nature and can encompass temperature extremes
ranging from -22 to +140 degrees Fahrenheit, as well as severe moisture and
humidity conditions and the infiltration by flying or wind-borne debris, such
as sand, dust or other particles. In the operational area, the hazards
involve strong vibrations and shocks that result from rough handling and
transportation as well as electric interference or internal thermal
conditions. In certain situations, the signals emitted by other electronic
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equipment may interfere with and distort the proper functioning of
computers. In addition, as increasingly more computing power is inserted
into small spaces and containers, the heat generated by the computer itself
may cause the processor to malfunction or fail.
A significant market for ruggedized computers is the public safety
market. New computer and ruggedization technologies have enabled public
safety organizations to advance into mobile computing as a way to increase
effectiveness and efficiency of the officers on the street. It is estimated
that there are approximately 330,000 public safety vehicles in
approximately 17,000 local police, sheriff and special police agencies.
The growth in the public safety market for rugged mobile computers is
driven by several factors. There has been an increase in federal funding
made available to local public safety agencies through the COPS MORE and
other programs which are designed to increase the number of police on the
street. There is also an effort to integrate dispatch, field data and
communications systems. Also, there are currently more rugged mobile
computer options, including the PCMobile, available to public safety
organizations. As public safety officers become more familiar and
comfortable with the use and benefits of new technology, management
believes that the market will continue to grow.
Computer Security. All electronic equipment, including computers,
monitors, keyboards, printers and related peripherals produce electromagnetic
emanations through the air or through conductors. As early as the 1950s,
government and industry observers began to become concerned about the
possibility that electronic eavesdroppers could intercept emanations,
decipher them, obtain information about the signals used inside the emanating
electronic equipment, and use this information to reconstruct the data being
processed by the equipment. They speculated that eavesdroppers could breach
security even some distance from the equipment.
Studies of signal interception and decoding have borne out these
speculations. With virtually no risk of detection, eavesdroppers using
relatively unsophisticated equipment can intercept and decipher signals from
an electronic source. Modern listening devices allow an eavesdropper to
detect emissions and reproduce data streams or video screen images - for
example, to read the computer display screens on the desktops in a remote
building. It is estimated that the components needed to perform such a
penetration would cost as little as $300, would be available at a local
electronics store, and would leave no evidence of penetration during or after
the intrusion.
In the late 1950s, the U.S. government established a program called
TEMPEST aimed at attacking the emanations problem. TEMPEST has become an
umbrella name for the technology that contains or suppresses signal
emanations. An unclassified government publication describes TEMPEST
emanations as "unintentional, intelligence-bearing signals which might
disclose sensitive information transmitted, received, handled, or otherwise
processed by an information processing system."
Accordingly, users of computer equipment and peripherals that are
processing top secret or classified information use equipment specifically
designed to suppress or contain the electromagnetic emanations of potentially
compromising information. Customers for TEMPEST computers are typically
United States and foreign military and government agencies.
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The Company, through its CSS subsidiary, manufactures a full line of
TEMPEST and EMI ("electromagnetic interference") computers, both stationary
and portable, and related products that protect against the interception of
electromagnetic emanations.
The Company is currently involved in negotiations to sell its secure
computing division. See Note 18 of the accompanying financial statements for
a further discussion of the potential sale.
Wireless Security. Cellular telephone service is a form of
telecommunications designed to provide high quality wireless telephone
service to a large number of simultaneous users from hand held, vehicle
mounted or fixed radio telephones. Beginning in the early 1990s, public
awareness of the ease of unauthorized cellular telephone monitoring
increased. The Company, through its Cycomm subsidiary, began to develop its
cellular security products in 1992 in response to government and commercial
cellular security concerns.
The Company developed a product called the Slice CSD, which provides
full encryption over analog cellular systems and is compatible with the
Lucent Telephone Security Device product line. Historically, the main
customer for the CSD Slice product was the U.S. Government. In 1997, the
Company determined that the commercial market for cellular security had not
developed to a degree that demand for the Companys products would support
the continuing engineering required to advance the product line. In
addition, continued U.S. Government restrictions on the export of encryption
technology severely limited the global market potential for these products.
During 1997, Cycomm discontinued development and further production of
cellular security products and is instead concentrating on licensing the
patented Slice design. While two license agreements have been executed,
royalty payments were immaterial and are expected to remain immaterial in the
future as the related products on analog technology, while the wireless industry
is shifting towards the use of digital phones.
The Company's Product Lines and Services
The Company manufactures and sells a complete line of secure and rugged
computers and peripherals from a ruggedized laptop computer to an "office in
a suitcase" for the mobile field office market. Transmission options include
both wired and a variety of wireless modes including satellite links and
cellular packet data ("CDPD"). Security options range from encryption to a
"TEMPEST" configuration.
PCMobile. The PCMobile is a "ruggedized" mobile computer specifically
developed for optimal mobility, flexibility and performance under severe
operating conditions. It is ideal for public safety and field service. The
PCMobile is certified to be used almost anywhere, performing reliably in
spite of extreme conditions. The rugged magnesium housing makes the PCMobile
spill and shock-proof and preserves the unit's structural integrity even at
high temperatures. The light blue casing reflects rather than absorbs light,
helping to maintain the electronic circuitry at lower operating
temperatures. The screens are either transflective monochrome or color and
can be seen in direct sunlight. Rubber gaskets are fitted around door
openings and between case mating parts. All external connectors have been
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rain-tested. The PCMobile also stands up to vibration and protects against
electrostatic discharge. CSS manufacturers a Pentium and a 586 model of the
PCMobile.
TEMPEST Pentium Computer. The TEMPEST Pentium Computers, model
205MX,and 210MX are 133MHz and 166MHz products based on the Intel Pentium TM
microprocessor with the industry standard ISA/PCI bus packaged in the
exclusive CSS TEMPEST cabinet. Both products include a 3.5" 1.44MB floppy
drive and can be configured as a desktop, or rack mount unit. It can
accommodate up to 4 storage devices including floppy drives, removable IDE
and SCSI hard drives, cartridge drives and tape backup systems. High speed
32 bit I/o is provided by 3 PCI slots.
TEMPEST Pentium Laptop Computer. The XL 425LT uses an Intel Pentium
TM 200MHz MMX microprocessor with an optional upgrade to a 233MHz processor
with memory upgrades up to 128MB. This laptop has a 12.1" display with 2MB
VRAM and 800 x 600 resolution while offering 1280 x 1024 resolution for
external monitors. Removable disk drives available range from 2.1 to 4.0 GB
with larger models on the way. In the tradition of CSS's strategy to listen
to our customers and design and build to their needs, the 425LT has two
serial ports and supports both the 1.44MB floppy and the 20X CDROM drive
simultaneously. Housed in an aluminum alloy chassis, this laptop is
significantly more rugged than standard commercial units and can be
classified as a COTS ("commercial off-the-shelf") Rugged product.
TEMPEST Laptop Computer. The TEMPEST Pentium Laptop computer, Model
405LT is powered by a 166MHz Intel Pentium TM microprocessor. This laptop
has a 12.1" display with 2MB VRAM and 800 x 600 resolution while offering
1280 x 1024 resolution for external monitors. This laptop uses a modular
design so a number of options can be selected to allow for the addition of
such options as a CD-ROM or a second Lithium Ion battery. One of the new
features of this model is its ability to allow user installation of a
FORTEZZA card while maintaining TEMPEST integrity, while also allowing a
second communications device. The 405LT meets the most stringent TEMPEST
requirement while operating with AC power, automobile power, or from the
internal battery. Housed in an aluminum alloy chassis, this laptop is
significantly more rugged than standard commercial units and can be
classified as a COTS Rugged product.
TEMPEST/Inkjet Printer. The 3416T is the XL TEMPEST version of the
popular HP 340 Inkjet printer. The products supports both monochrome and
color versions. The color capability of this product is 3 pages per minute
at 300dpi. Housed in an aluminum chassis, this printer is significantly more
rugged than standard commercial units and can be classified as a COTS Rugged
product.
TEMPEST Color Graphic Portable Scanner. The 9414T is a high resolution
TEMPEST portable scanner suitable for notebook travel use. It is based on
the UMAX Page Office Color Scanner and connects via the Centronics Parallel
Interface. With it's integrated PageManager bundled software, you can copy,
fax, E-mail and file text and graphics documents with the click of a button.
In addition, complete image editing software allows you to edit 24 bit full
color photos at 300 dpi.
EMI Pentium Personal Computer. The XL 205E delivers the power of a
Pentium CPU with the Industry Standard ISA/PCI bus packaged in CL Computing's
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new EMI tested cabinet. It incorporates a 3.5" 1.44MB floppy drive and can
be configured as a desktop, or rack mount unit. It can accommodate up to 4
storage devices including floppy drives, removable IDE and SCSI hard drives,
cartridge drives and tape backup systems. High speed 32 bit I/O is provided
by 3 PCI slots.
EMI Pentium Laptop computer. The XL 405E delivers the power of Intel
Pentium TM 166MHz MMX microprocessor power combined with a modular design to
allow a wide range of option selection including large hard drives, CD-ROMs
and additional Lithium Ion batteries The design accommodates the user
installation of the FORTEZZA card while still allowing a second
communications device. The 405E meets the most stringent EMI requirements
while operating with AC power, vehicle power, or from the internal battery.
Housed in an aluminum alloy chassis, the 405E printer is significantly more
rugged than standard commercial units and can be classified as a COTS Rugged
product.
Cycomm Secure Solutions Customer Service Group. CSS offers a full
range of security services including our worldwide Customer Service Group.
This group has been providing superior on-site and return-to-factory product
support in excess of twenty (20) years. CSS requires that all CSS Field
Technicians and Engineers complete "A+ Certification". With A+ Certification
as a basis, these field service personnel are then factory trained to repair
all CSS products. Cycomm Secure Solutions is an experienced organization in
dealing with security issues in equipment maintenance. As such, all field
service personnel are also trained in the specific requirements of
maintenance operations in secure environments to ensure that the security of
the equipment is not compromised. CSS provides 24 hour toll free technical
support to ensure our customers' problems are resolved in a timely manner.
TEMPEST Monitors. CSS offers a full line of ruggedized TEMPEST and
EMI compliant monitors. The EMI and TEMPEST designs use a combination of
containment and suppression techniques that retain the OEM cabinetry. A high
quality OCLI glass screen with anti-reflective coating is incorporated into
the display providing maximum resolution and brightness.
Mobile Field Office Systems. The rugged mobile imaging and
communications system ("MICS") is a portable office that fits into a
lightweight, rugged, suitcase-type carrier suitable for commercial travel.
This self-contained system is easily taken into harsh field environments and
provides personnel with the capability to accomplish their data collection
and transmission tasks using landline, cellular and satellite communications
with state-of-the-art technology in the military environment. Standard
peripherals include a ruggedized computer (486 or Pentium driven) a removable
hard disk drive, modem, fax card, cellular phone, printer, scanner, and a
battery backup. A digital camera is an optional feature allowing the
operator to take pictures or collect data and immediately transfer it to
other users or a central location.
Cellular Security Device ("Slice CSD"). The Slice CSD incorporates
voice encryption security for use with the Motorola MicroTAC line of cellular
phones. The Slice CSD uses Lucent SurityTM encryption technology, licensed
from Lucent in 1995, and is compatible with Lucent's Telephone Security
Device 3600 family of products ("TSD"). Encryption technology provides a
higher level of communications security when compared to more common analog
scrambling technologies. Encryption level security is required by most
government and law enforcement users.
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The Company no longer manufactures the Slice CSD, however Cycomm has
licensed the technology to two separate manufacturers. Future royalty
payments are expected to be immaterial to the Company's total revenue.
Manufacturing and Supply
The Company designs and engineers substantially all of its rugged and
secure computers, purchases components from third parties or Original
Equipment Manufacturers ("OEM") and tests and assembles the final products.
As part of this process, the Company specifically designs for its computers
(with the exception of the Company's secure computer, for which the Company
uses commercial products from other manufacturers), the electronics or
printed circuit board, which is the most important, sophisticated and complex
element thereof. At times, the board can be composed of as many as twelve
layers. The Company uses surface mount technology ("SMT") to attach
components to the computer boards which enhances durability and ruggedness
over the older mounting technology. In SMT, the components are glued to the
board by means of a chemical adhesion process and are then soldered instead
of being inserted into holes in the board and soldered. SMT is a more
precise manufacturing technique and offers better insulation against
vibration and shock. The Company fabricates the prototype of the board,
tests it, purchases all the necessary components for the board and then
provides them in kit form to a specialized board fabricator for both pilot
and production runs.
This approach to outsourcing differs from that followed by most other
rugged computer manufacturers which, the Company believes, operate on a
turn-key basis with their board fabricators, who handle the design, testing
and purchase of all components themselves and then furnish the manufacturer
with the completed boards. In contrast, the Company's approach to board
fabrication allows it to maintain better control of the quality and delivery
of the boards. In addition, the Company's personnel serve as on-site
inspectors at the plants of the board fabricator. The fabricator employed by
the Company applies surface mount technology in the fabrication of its
printed circuit boards.
The Company anticipates that it will continue to outsource board
fabrication. Given the rapid changes in computer technology, the Company is
not capable of keeping abreast of the costly purchase requirements for new
production equipment necessary in the precise placement of electronic
components on boards. Outsourcing allows the Company's products to receive
the benefit of the latest technological development at an acceptable cost.
Once the boards are completed, they are tested by the fabricator and, upon
satisfactory completion of such tests, are shipped to the Company. When
delivered, the Company further tests the complete boards and other components
and then assembles the computers. Apart from the printed circuit boards, the
components that the Company purchases from external sources include chassis,
wire harnesses, computer chips, keyboards, displays and metal cases.
The Company does not assemble its products on a continuous
mass-production basis. Instead, its computers are usually assembled on a
batch basis in which products move irregularly from station to station.
Because the Company's production runs rarely reach the volume levels of
commercial production, there are no or few economies of scale and related
cost reductions that are achievable. Tests are performed at various stages
of the process according to the Company's standards or as requested by
specific customers. Further testing of products is generally accomplished at
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the end of the assembly process. The Company's manufacture of computers is
done pursuant to specific purchase orders or for general inventory purposes.
The Company utilizes modern equipment for the design, engineering,
assembly and testing of its products. The Company has utilized a portion of
the funds from various financings to acquire additional equipment to enhance
its operating efficiency in such areas and to increase its capacity in order
to facilitate increased production, when and if required, as well as to
obtain better control of quality, inventory and order processing.
Generally, the Company is not a party to any formal written contract
regarding the deliveries of its hardware, supplies and components or their
fabrication. It usually purchases such items pursuant to written purchase
orders of both individual and blanket variety. Blanket purchase orders
usually entail the purchase of a larger amount of items at fixed prices for
delivery and payment on specific dates.
The Company relies on one board fabricator located within the same
geographical area as its design, engineering and assembly facilities.
Certain components used in its computers are obtained from sole sources, such
as LG Technologies and Northern Die Cast. The Company has also licensed its
software from sole sources, including Microsoft and Phoenix Technology. The
Company has occasionally experienced delays in deliveries of components and
may experience similar problems in the future. In an attempt to minimize
such problems, the Company has developed and keeps an inventory of parts that
are generally more difficult to obtain. However, any interruption,
suspension or termination of component deliveries from the Company's
suppliers could have a material adverse effect on it business. Although
management believes that in nearly every case alternate sources of supply can
located, inevitably a certain amount of time would be required to find
substitutes. During any such interruption in supplies, the Company may have
to curtail the production and sale of its computers for an indefinite period.
The Company's design, engineering and assembly facilities are located
in Brossard, Quebec, Canada for the rugged PCMobile laptops and Sebastian,
Florida for the secure computer products. The Sebastian, Florida facility
complies with certain classified contracts specifications necessary for the
manufacture and assembly of products supplied and meets the quality
management and assurance standards of an international rating organization
(ISO-9001).
The Company has entered into licensing arrangements for certain
hardware and software elements contained in, or used in conjunction with, its
computers. These agreements are usually non-exclusive, provide for minimum
fees and royalties related to sales to be paid by the Company to the
particular licenser, run for a limited term and are subject to other terms,
conditions and restrictions.
The Company receives its basic operating software system MS-DOS with
various Windows versions from Microsoft, Inc. pursuant to such licensing
arrangements. It also obtains from Phoenix Technologies, Inc. its BIOS
(Basic Input/Output System) pursuant to a separate license agreement. Under
either arrangement, the Company may modify such software and occasionally
alter the BIOS for special situations. The termination, suspension or
curtailment of these or other licensing arrangements to which the Company is
a party may have a material adverse impact on its business and operations.
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Although the Company relies on a limited number of companies in the
manufacture of its products, it believes that the specific parts employed in
the manufacturing process are available from a variety of suppliers.
Further, the Company believes that additional manufacturing sources could be
found if necessary. The Company believes its relationship with its suppliers
is satisfactory.
Marketing and Sales
The Company markets and sells its secure computer products through an
internal sales force of two individuals, approximately five resellers in the
United States and approximately ten resellers abroad. The Company markets and
sells its rugged products through an internal sales force of nine
individuals, approximately thirty resellers in the United States and
approximately four resellers abroad. Its resellers cover approximately all
fifty states, including Washington, DC, and its foreign distributors operate
in ten countries, including England, France, Japan, Germany, South Korea and
Portugal.
The Company's relationship with its resellers is generally governed by
a written contract, terminable on 30 days' prior notice. These contracts
usually provide for non-exclusive territorial and product representation and
discounts of between 20% to 30% of the list price on standard products based
on the individual resellers annual sales volume. Discounts on non-standard
products and custom engineering are usually subject to negotiation between
the parties in accordance with the terms of the contract and are priced on a
case-by-case basis dependent upon the level of effort in design, test,
manufacture, warranty and support. However, they tend to range from 25% to
35% in practice.
The Company's resellers typically purchase the Company's products and
then resell them to their customers. These resellers accounted for an
aggregate of approximately 90% of the Company's secure computer and rugged
computer sales. The Company has reseller agreements with Ericcson, GE
Capital, PRC, Unisys, NTT, GTE and Matra for its rugged computers. The
Company has reseller agreements with Dulles Networking, Office Solutions, EDS
Ltd., Bedriftssystemer, Boeing and GTE for its secure computers. The loss of
certain of such resellers may have a material negative effect on the
Company's business.
Sales of the Company's products or services to foreign resellers are
also generally made pursuant to written contracts. Under such contracts, the
distributor is granted either an exclusive or non-exclusive territorial and
product representation as well as discounts based on the list price ranging
from 20% to 30%, depending on the type or annual amount of products sold. In
some cases, there are minimum order requirements. Due to the custom nature
of the Company's products and specifically U.S. Governmental International
Traffic in Arms Regulation (ITAR) controls for secure computing products, its
foreign resellers generally do not keep its computer in their inventory until
specific orders are obtained. The term of these agreements generally run
from 1 to 3 years but are terminable on 60 days advance notice. Payment is
due in U.S. dollars within 30 days after delivery. These contracts are
subject to other terms and conditions. No one international distributor
accounted for a material portion of the Company's total sales in any period
referred to above.
The Company promotes its rugged and secure computer products through
the dissemination of product literature, attendance and exhibition at trade
<PAGE>
Page 13
shows and the distribution of news releases on special developments to trade
magazines and newsletters to an extensive customer list. The Company does
some advertising in trade periodicals. Management believes that, to date,
most of the Company's sales leads have been generated by trade shows, its web
sites and word-of-mouth referrals. The Company is expanding its sales and
marketing efforts in all of its markets as follows: (i) increasing its
presence at trade shows with larger booths and more extensive exhibits; (ii)
increasing the number of trade shows in which Company personnel attend and
products are presented; (iii) hiring additional sales personnel and
consultants to gather leads and promote sales; (iv) expanding sales and
marketing activities in the utility and commercial markets; and (v)
investing in research and development in order to increase its product
offering.
In the public safety and government market, the sales cycle for the
Company's products usually entails a number of complicated steps and can take
from three months to one year. Sales to the public safety and government
markets are greatly influenced by special budgetary and spending factors
pertinent to these organizations.
Warranty and Customer Service
The Company usually provides one-year warranties on all its products
covering both parts and labor, however extended warranties may be purchased
by customers. Additionally, the Company offers a lifetime warranty on the
cases of the PCMobile. At its option, the Company repairs or replaces
products that are defective during the warranty period if the proper usage
and preventive maintenance procedures have been followed by its customers.
Repairs that are necessitated by misuse of such products or are required
beyond the warranty period are not covered by its normal warranty.
In cases of defective products, the customer typically returns them to
the Company's facility. Service personnel replace or repair the defective
items and ship them back to the customer. Generally, all servicing is done
at the Company's plant and customers are charged a fee for those service
items that are not covered by warranty. In addition to its extended
warranties, the Company offers its customers maintenance and service
contracts on both its PCMobile and TEMPEST products.
The Company's customer service personnel answer technical questions
from customers and offer solutions to their specific applications problems.
In certain instances, other personnel receive and process orders for product
demonstrations, disseminate pricing information and accept purchase orders
for computers.
Backlog
On December 31, 1998, the Company had a backlog of contracts and
purchase orders of approximately $3.3 million in its mobile computing segment
as compared to $6.7 million at December 31, 1997. Subsequent to December 31,
1998, the Company received contracts and purchase orders of approximately
$2.6 million for mobile computing equipment which is not included in the
above backlog amount.
<PAGE>
Page 14
In its secure computing segment, the Company had a backlog of contracts
and purchase orders of approximately $240,000 at December 31, 1998 as
compared to $900,000 at December 31, 1997. Subsequent to December 31, 1998,
the Company received contracts and purchase orders of approximately $3.4
million for secure computing equipment which is not included in the above
backlog amount.
Backlog consists of contracts and purchase orders for computer
equipment and peripherals to be manufactured and delivered usually during the
upcoming 12 months. The contracts and purchase orders define the price and
specifications of the equipment to be delivered. However, due to the nature
of the business, the backlog at any particular date may not be indicative of
the Company's revenues or other operating results for any subsequent fiscal
period. The Company cannot, therefore, assure that the backlog will be
realized as revenue.
Reliance Upon Certain Customers
The Company is not dependent upon any single customer that purchases
its products. However, sales to two major customers comprise 16% and 15%
respectively, of sales for the year ended December 31, 1998. Sales to two
major customers comprised 9% and 9% respectively, of sales for the year ended
December 31, 1997.
Research and Development
The markets served by the Company are characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's business requires
substantial ongoing research and development efforts and expenditures. Its
future success will depend in large measure on its ability to enhance its
current products, and develop and introduce new products that keep pace with
technological developments in response to evolving customer requirements.
The Company's research and development activities are primarily accomplished
on an in-house basis, sometimes supplemented by third-party subcontractors
and consultants.
During fiscal year 1998, the Company continued to make relatively large
research and development investments on the PCMobile product line. These
significant changes mainly focused implementing faster processors such as
Pentium chips, new functionality and new screens.
During the year ended December 31, 1998 and year ended December 31,
1997, the Company spent $1,695,208 and $1,307,720, respectively, on research
and product development, primarily for development of new products and
products complementary to the existing line of secure and rugged computer
products. The Company anticipates additional research and development
expenditures on future development of products.
<PAGE>
Page 15
Intellectual Property and Patents
Proprietary information and technical know-how are important to the
Company's success. The Company holds various patents, as detailed below, and
has certain trademark protections for its products. The Company currently
has patent protection for certain of its principal proprietary technologies.
There can be no assurance that any patents issued are or will be valid, or
that others will not develop functionally equivalent or superior technology
that does not infringe the Company's patents. There can also be no assurance
that the Company's existing patents will go unchallenged.
Cycomm is the assignee of U.S. Patent No. 4,864,566 issued on September
5, 1989, entitled "Precise Multiplexed Transmission and Reception of Analog
and Digital Data Through a Narrow-Band Channel." This patent covers the
basic synchronization that makes it possible to achieve a certain level of
voice quality and security. Cycomm voice privacy products are partially
protected by this patent because an adaptation of the synchronization
technique is used. Furthermore, protection is enhanced by utilizing large
amounts of microcode embedded in microprocessor chips that are dependent upon
semi-custom gate array circuits. Both microcode and circuits are
proprietary.
On January 20, 1998, Cycomm received, as assignee, U.S. Patent No.
5,711,013 entitled "Conforment Compact Portable Cellular Phone Case System
and Connector." This patent covers Cycomm's Slice packaging and
functionality, as it applies to a number of potential applications for the
Motorola MicroTAC line of cellular phones. Cycomm's Slice products, the
Series 300 Slice HPU and Series 500 Slice CSD, now have full patent
protection. The Company plans to pursue licensing opportunities of the Slice
technology, and to protect against any infringement of the Slice patent.
Regulatory Approvals
Certain of the Company's products are subject to approval by the
Federal Communications Commission ("FCC") in the United States. The FCC
requires that products not exceed certain levels of radio wave emanation so
that they will not interfere with other electronic equipment. Furthermore,
telephone products must meet certain standards for interfacing into the
telephone line, such as impedance matching and isolation. All of the
Company's products have received FCC approval for both radiation and
telephone connection.
In general, the FCC and its approval process is objective. Product
designs are required to meet these objective criteria and specifications. In
the event that a Company privacy product failed a test, the introduction of
the product would be delayed.
Under certain circumstances, the Company is also subject to certain
U.S. State Department and U.S. Department of Commerce requirements involving
prior clearance of foreign sales. Such export control laws and regulations
either ban the sale of certain equipment to specified countries or require
U.S. manufacturers and others to obtain necessary federal government
approvals and licenses prior to export. As a part of this process, the
Company generally requires its foreign distributors to provide documents that
indicate that the equipment is not being transferred to, or used by,
unauthorized parties abroad.
<PAGE>
Page 16
The Company and its agents are also governed by the restrictions of the
Foreign Corrupt Practices Act of 1977, as amended ("FCPA"), which prohibits
the promise or payments of any money, remuneration or other items of value to
foreign government officials, public office holders, political parties and
others with regard to the obtaining or preserving of commercial contracts or
orders. These restrictions may hamper the Company in its marketing efforts
abroad.
To date, the Company has been able to comply with all governmental
requirements without incurring significant costs. However, the Company
cannot determine the extent to which future earnings may be affected by new
legislation or regulations affecting its industry.
Competition
The Company competes in the rugged portable and secure computer
business with a wide variety of computer manufacturers and repackagers, some
of which are larger, better known and have more resources in finance,
technology, manufacturing and marketing. The Company competes based on
customization capabilities, price, performance, delivery and quality. In
some situations, the Company is the highest priced bidder.
Typically, the companies that market and sell ruggedized computers are
repackagers having little or no input in the design of their electronics and
the selection and mounting of components on printed circuit boards. They
usually purchase the computer boards and sub-assemblies in an "as is"
condition from commercial manufacturers. The major contribution of the
repackagers to the protection of the computer is a tougher box in which the
computer is housed. However, in many cases even this stronger covering fails
to shield the computer from the penetration of rain, snow, fog, dust or other
particles. In contrast, the Company uses industrial-type or customized
components for most of its computers rather than strictly ordinary commercial
ones, as do many of its competitors. The company also applies SMT to the
fabrication of most of its computer boards. In addition, the Company designs
such boards, the computer's outer case, keyboards, subassemblies and other
elements in order to maximize the ruggedness of its products, to furnish
customization of electronics and software to give the customer greater
control over configuration and components.
With respect to its secure computer business, the Company encounters
competition from Wang Laboratories, Secure Computer Systems, and NAI. As for
its PCMobile rugged laptops, the Company mainly encounters competition from
Panasonic. Certain large manufacturers of commercial notebook computers such
as Panasonic and IBM have introduced commercial notebooks that have been
sealed and ruggedized to some extent. These companies are presently offering
such products at prices from approximately one-third to one-half the
Company's more rugged versions.
Management believes that the Company's ability to increase market
penetration in the commercial sector will be limited substantially by the
entry of such manufacturers into the ruggedized computer market.
In the public safety and secure computer markets, the Company will
often be engaged, directly or indirectly, in the process of seeking
competitive bid or negotiated contracts with government departments and
agencies. These government contracts are subject to specific rules and
regulations with which the Company must comply. However, the Company is
<PAGE>
Page 17
often one of only a few companies whose products meet the required
specifications designated by such customers.
In most cases, the Company tends to be the higher priced bidder for
public safety bids. The reasons for this situation are numerous. The
Company designs its computers on an overall basis to assure their ruggedness
and use in the most demanding circumstances. Accordingly, it generally
employs more expensive components than its competitors. These generally more
expensive components consist of industrial or higher-level commercial type
instead of ordinary commercially available parts. The Company's computers
are enclosed in sealed containers. Moreover, the Company makes extensive
modifications and refinements of its computers for its customers pursuant to
their specifications and special needs. Consequently, the Company's products
generally function at a higher level of performance and reliability than its
competitors.
For those applications in which harsh environmental and operational
conditions prevail, customers are sometimes willing to pay higher prices,
especially where few, if any, other companies offer similar devices. In
those less demanding circumstances, the Company's products sell at a
competitive disadvantage and often are not purchased because the applications
do not justify its higher prices.
Environmental Issues
Compliance cost with environmental laws is not expected to materially
adversely affect the business of the Company.
Employees
The Company currently employs approximately 132 people, of which
approximately 77 are employed in the United States and 55 in Canada.
Approximately 31 employees work in customer sales and service, 29 employees
work in administration, 29 employees work in research and development and 43
employees work in manufacturing.
None of its employees is covered by a collective bargaining agreement
or is represented by a labor union. The Company considers its relationship
with its employees to be satisfactory.
The design and manufacture of the Company's equipment requires
substantial technical capabilities in many disparate disciplines from
mechanics and computer science to electronics and mathematics. While
management believes that the capability and experience of its technical
employees compares favorably with other similar manufacturers, there can be
no assurance that it can retain existing employees or attract and hire the
highly capable technical employees necessary in the future on terms deemed
favorable to the Company, if at all.
<PAGE>
Page 18
ITEM 2. DESCRIPTION OF PROPERTY
As of December 31, 1998, the Company leased the following facilities:
Approximate
<TABLE>
<S> <C> <C> <C>
Location Type of Facility Condition Square Ft.
McLean, VA Executive Office Excellent 4,000
Sebastian, FL Manufacturing, R&D Excellent 44,000
And Distribution
Montreal, QB Manufacturing, R&D Excellent 10,300
and Distribution
Albuquerque, NM Manufacturing, R&D Excellent 7,500
And Sales
</TABLE>
Management believes that its manufacturing facilities at Sebastian, FL
and Montreal, QB will meet its operational needs for the foreseeable future.
In the event that additional facilities are needed to accommodate the
continued growth in revenues and market share, such facilities are available
in the immediate vacinity of the current locations.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was instituted against the Company on September 2, 1998 in
the United States District Court for the Eastern District of Virginia by the
trustee in bankruptcy of M3i Technologies, Inc., a Quebec corporation from
which the Company and a subsidiary purchased certain PCMobile assets in June
1996. The lawsuit alleges breach of contract and misrepresentation in
connection with the "earn out" provision of the asset purchase agreement and
seeks monetary damages and other relief. The Company is currently involved
in settlement negotiations with M3i Technologies, Inc.
The Company instituted a lawsuit on February 5, 1999 in the Circuit
Court of the Thirteenth Judicial Circuit in and for Hillsborough County,
Florida against Infotech International, a Florida corporation involved in the
resale of the Company's PCMobile computers. The lawsuit alleges breach of
contract and conversion of funds. The Company is seeking damages of $592,959
plus interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
<PAGE>
Page 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1998, the Company's common stock was traded on The
American Stock Exchange ("AMEX") under the symbol "CYI". However, on January
21, 1999, the Company was notified by the AMEX of their decision to delist
Cycomm's stock from the exchange for failure to meet certain listing
requirements. Specifically, the Company did not meet the minimum
stockholder's equity requirement and had incurred consistent net losses in
the prior fiscal years. Cycomm initially appealed the AMEX decision, however
based on the advice of the Company's professionals and further consideration
by management, the Company withdrew its appeal of the delisting. Trading
of the Company's common stock was halted April 13, 1999 and Cycomm will
be delisted from the AMEX on April 30, 1999. The Company intends to apply
for listing on the Over-the-Counter Bulletin Board immediately following the
delisting from AMEX.
The following tables set forth the reported high and low sales prices as
reported by AMEX for the periods indicated:
<TABLE>
High Low
---- ---
Year Ended December 31, 1997
<S> <C> <C>
First quarter $4.00 $2.63
Second quarter 3.31 2.00
Third quarter 3.50 2.50
Fourth quarter 2.69 1.25
Year Ended December 31, 1998
First quarter $2.69 $1.63
Second quarter 3.56 1.88
Third quarter 4.06 1.56
Fourth quarter 2.31 1.69
</TABLE>
On March 1, 1999, as reported by the Company's transfer agent, shares
of common stock were held by 1,010 persons, based on the number of record
holders, including several holders who are nominees for an undetermined
number of beneficial owners.
The Company has not paid any dividends and has no present intention of
paying dividends on the common stock in the foreseeable future as it intends
to retain any future earnings to fund operations and the continued
development of its business. The declaration and payment of dividends and
the amount paid, if any, is subject to the discretion of the Company's Board
of Directors and will be dependent on the earnings, financial condition, and
capital requirements of the Company and any other factors the Company's Board
of Directors may consider relevant. The Company is required to pay dividends
on its 10% convertible redeemable preferred stock. Dividends on the
preferred stock can be paid in either cash or in shares of the Company's
common stock. To date, all dividends have been paid in shares of common
stock.
<PAGE>
Page 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
<TABLE>
Year Ended Year Ended
December 31, December 31,
1998 1997
<S> <C> <C>
Sales $18,991,587 $15,678,667
Cost of Sales 15,181,857 11,257,321
---------- ----------
Gross Profit 3,809,730 4,421,346
--------- ---------
Selling, general & 7,691,052 6,653,643
administrative
Research & 1,695,208 1,307,720
development
Depreciation & 2,105,116 1,050,998
amortization
Other (89,528) 658
------- ---
11,401,848 9,013,019
---------- ---------
Loss from operations (7,592,118) (4,591,673)
Interest expense (778,065) (946,235)
Other income, net 74,134 115,255
------ -------
(703,931) (830,979)
-------- --------
Net loss $(8,296,049) $(5,422,652)
=========== ===========
Beneficial return on
preferred shares (150,000) ---
Net loss attributable ----------- -----------
to common shareholders $(8,446,049) $(5,422,652)
=========== ===========
Net loss per share $(0.78) $(0.59)
====== ======
</TABLE>
The revenues for the year ended December 31, 1998 were $18,991,587
which represents an increase of 21% over revenues of $15,678,667 for the
prior year. Of these revenues, sales of the PCMobile rugged laptop computers
accounted for $13,154,871 as compared to $8,064,465 in the prior period.
However, sales of secure computing products decreased to $4,348,376 as
compared to $5,787,487 in the prior year. The remaining revenue of
$1,488,340 related to the communications security products segment and
reflected a decrease of $338,375 from the prior year.
Cost of sales for the year ended December 31, 1998 were $15,181,857 as
compared to cost of sales of $11,257,321 for the prior year. Gross margin
for the Company decreased to 20% for the year ended December 31, 1998 from
28% in the prior year. The decrease in gross margin is largely the result of
the write-off of $615,823 in obsolete inventory in the secure computing
division. The mobile computing division also experienced lower gross margins
as a result of the decrease in the selling price of PCMobiles with 586
processors, which were being phased out for the introduction of the PCMobiles
with Pentium processors. The gross margin for sales in the communications
security products segment was 43%, as compared to 36% in the prior year. The
increase in gross margin in the communications products segment is due to a
change in sales mix, as revenues from the higher margin government consulting
and engineering services increased, and sales of the Company's wireless
security products decreased.
<PAGE>
Page 21
Operating expenses increased to $11,401,848 for the year ended December
31, 1998 as compared to $9,013,019 for the prior year. The increase is
largely due to an increase in depreciation and amortization expenses, which
increased to $2,105,116 for the year ended December 31, 1998, an increase of
$1,054,119 from the prior year. The increase in depreciation and
amortization expense is the result of depreciation of PCMobile demonstration
units ("demos"). Selling, general and administrative ("SG&A") expenses
increased to $7,691,052 for the year ended December 31, 1998 as compared to
$6,653,643 from the prior year. The increase in SG&A expenses for 1998 is
the result of two significant write-offs of bad debts of $592,959 and
$296,928 and the inclusion of compensation expense related to the issuance of
300,000 stock options to non-employees, valued at $450,000. During 1998, the
Company also incurred an expense of $615,823 related to the impariment
of its inventory. Research and development costs increased $387,488 to
$1,695,208 for the period ended December 31, 1998. This increase reflects the
Company's expenditures on the Pentium and Pentium II models of the PCMobile
computer, as well as enhancements of the TEMPEST line of computers.
Interest expense for the year ended December 31, 1998 was $778,065 as
compared to $946,235 for the prior year. This decrease is due to reduced
non-cash interest expense offset by increased interest on the Company's
credit lines and an increase in the interest rate on the Company's convertible
debentures. Included in interest expense are charges of $13,889 and
$478,720 for the years ended December 31, 1998 and December 31, 1997,
respectively. These are non-recurring, non-cash charges related to
convertible debt financing that give effect to beneficial conversion features.
The net loss of $8,296,049, or ($0.78) per share, for the year ended
December 31, 1998 represents an increase from $5,422,652, or ($0.59) per
share for the year ended December 31, 1997. The increase in net loss is a
result of the decrease in gross margins, offset by the increase in
depreciation and amortization costs related to demo units, the increase in
SG&A costs due to bad debt write-offs and stock-based compensation, and the
increase in research and development costs for both the mobile computing
and secure computing segments. The loss per share is computed on weighted
average number of shares outstanding of 10,835,688 for the year ended December
31, 1998 and 9,108,335 for the year ended December 31, 1997.
Liquidity and Capital Resources
The Company has satisfied working capital requirements through cash on
hand, available lines of credit and various debt and equity related
financings. At December 31, 1998, the Company had cash and cash equivalents
of $710,421.
In the year ended December 31, 1998, cash used in operations amounted
to $2,684,318. Cash used in investing activities was $477,326 during the year
ended December 31, 1998. Cash provided by financing activities was
$3,254,429 for the year ended December 31, 1998. The Company obtained cash
totaling $2,895,750 as a result of five separate private equity placements of
common stock. Additionally, during 1998 the Company obtained $900,000 from
the issuance of its Series B convertible redeemable preferred stock. The
Company had a net decrease of $318,417 in borrowings under the secured credit
facility during 1998. Various notes payable amounting to $173,575 were also
repaid during the year ended December 31, 1998.
The Company's net working capital decreased to ($3,501,702) at December
31, 1998, from $2,606,229 at December 31, 1997 as a result of several
factors. The Company's $3,000,000 of convertible debentures due February 28,
<PAGE>
Page 22
1999 were reclassified from long term liabilities to current liabilities.
Subsequent to December 31, 1998 the Company reached an agreement in principle
with the holders to extend the maturity date to April 1, 2000. Cycomm wrote
off accounts receivable for two large customers in the amounts of $592,959
and $296,928. Additionally, net working capital was decreased by a write-off
of obsolete inventory of $612,853.
Cycomm's auditors have issued a going concern qualification to their
opinion on the Company. Management is addressing the going concern issue
with several actions, including streamlining operations, evaluating potential
sales or dispositions of operating segments and further capitalizing the
Company through borrowings and private equity placements.
The Company has signed a Letter of Intent for the sale of the assets
of the secure computing subsidiary, Cycomm Secure Solutions Inc. to
an investment group led by that subsidiary's current management. Terms
of the transaction are currently being negotiated and are contingent on
approval by the Company's Board of Directors and secure lender. Management
believes that the proceeds of the sale will be approximately $800,000.
The Company would also retain accounts receivable of CSS of approximately
$600,000. Proceeds of the sale will be used to pay down a portion of the
Company's secured line of credit and to fund the Company's working
capital requirements.
The Company has also signed a Letter of Intent for the sale of
its secure telecommunications subsidiary, Val-Comm Inc. to an
investment group led by that subsidiary's current management. Terms
of the transaction are currently being negotiated, however management believes
that the proceeds of the sale will be approximately $750,000. Proceeds of
the sale will be used to fund the Company's working capital requirements.
Management believes that the sales of these subsidiaries would improve
the Company's current debt position, and would provide the Company with
additional working capital. Cycomm would be able to focus its resources on
the PCMobile product line, which has shown continued growth, and achieved
record revenues in 1998. In the event that one or more of the above
transactions are not completed or are unable to be completed on terms
accetpable to management, the Company will consider further cost cutting
measures, including the discontinuation of certain business segments, sale of
assets or protection under Federal bankruptcy laws.
Cycomm has historically been able to raise capital through private
equity placements. However, on January 21, 1999, the Company was notified by
the AMEX of their decision to delist Cycomm's stock from the exchange for
failure to meet certain listing requirements. Specifically, the Company did
not meet the minimum stockholder's equity requirement and had incurred
consistent net losses in the prior fiscal years. Cycomm will be delisted
from the AMEX on April 30, 1999. The Company intends to begin trading on the
Over-the-Counter Bulletin Board (OTCBB). The delisting from the AMEX and the
lack of an established trading pattern on the OTCBB could adversely affect
the Company's ability to raise additional capital.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
<PAGE>
Page 23
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Based on recent assessments, the Company determined that it will not need to
modify or replace its software or hardware so that those systems will
properly utilize dates beyond December 31, 1999.
Cycomm's plan to resolve the Year 2000 Issue involves the following three
phases: assessment, testing, and implementation. To date, the Company has
completed its assessment of systems that could be significantly affected by
the Year 2000. The completed assessment indicated the Company's significant
information technology systems will not be affected by the Year 2000 issue.
The computers manufactured by Cycomm are also Year 2000 compliant, and will
not need to be modified. Accordingly, the Company does not believe that the
Year 2000 presents a material exposure as it relates to the Company's
products. In addition, the Company is gathering information about the Year
2000 compliance status of its significant suppliers and vendors and continues
to monitor their compliance.
Cycomm has queried its significant suppliers regarding the status of Year
2000 compliance. To date, the Company is not aware of any supplier with a
Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no
means of ensuring that suppliers will be Year 2000 ready. The inability of
suppliers to complete their Year 2000 resolution process in a timely fashion
could materially impact the Company. The effect of non-compliance by
suppliers is not determinable.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, Cycomm has
not yet completed all necessary phases of the Year 2000 program. If the
Company identifies a vendor or supplier with a Year 2000 compliance issue, or
if a vendor or supplier is unable to complete their Year 2000 readiness
program, the Company could be materially adversely affected. The amount of
potential material adverse effects cannot be reasonably estimated at this
time.
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program. Cycomm plans to evaluate
the status of completion in March 1999 and determine whether such a plan is
necessary.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth in a separate
section of this Annual Report on Form 10-KSB. See Item 13. Exhibits and
Reports on Form 8-K and the Financial Statements commencing on page F-1 of
this Annual Report on Form 10-KSB.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While the Company is exposed to changes in interest rates as a result of its
outstanding debt, the Company does not currently utilize any deriative
financial instruments related to its interest rate exposure. Total debt
outstanding at December 31, 1998 was $5,705,315, consisting of $3,000,000 in
<PAGE>
Page 24
fixed rate, 12% convertible debentures, and $2,705,315 in a variable rate
secured line of credit. At this level of variable rate borrowing, a
hypothetical 10% increase in interest rates would have increased the Company's
net loss by approximately $36,612 for the year ended December 31, 1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
Page 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 relating to directors of the Company
is presented under the caption "Nomination and Election of Directors" of the
Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission (the
"Commission") no later than April 30, 1999.
Section 16 Reports
The information required by this Item is present under the caption
"Other Matters -- Compliance with Section 16(a) of the Exchange Act" of the
Company's definitive Proxy Statement to be filed with the Commission no later
than April 30, 1999.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is presented under the caption
"Executive Compensation" of the Company's definitive Proxy Statement to be
filed with the Commission no later than April 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is present under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be filed with the Commission no later
than April 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is presented under the caption
"Certain Transactions" of the Company's definitive Proxy Statement to be
filed with the Commission no later than April 30, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) See the financial statements of the Company and the report
thereon included in Item 7 of Part II of this Annual Report on Form 10-KSB.
(2) The following exhibits are filed as part of this Annual Report on
Form 10-KSB and incorporated by reference herein to the extent possible.
<PAGE>
Page 26
<TABLE>
Page Number
<S> <C> <C>
1.1 Certificate of Incorporation (1)
1.2 Certificate of Incorporation on Change of Name (1)
1.3 Certificate of Continuance (1)
1.4 Amended Articles of Incorporation ___
10.5 Stock Purchase Agreement by and among the Company (3)
and XL Vision Inc. and CSS Corporation
dated March 21, 1996
10.6 Asset Purchase Agreement among and between (4)
9036-8028 Quebec, Inc., Cycomm International Inc.
and M3i Technologies, Inc. and M3i Systems Inc.
date June 21, 1996
10.7 Management Services Agreement - Albert I. Hawk (5)
10.8 Employment Agreement - Michael R. Skoff (6)
10.9 Management Services Agreement - Rick E. Mandrell (7)
10.10 Management Services Agreement - G.T. Gangemi (7)
10.11 Commercial Revolving Loan, Additional Loan and
Security Agreement by and among the Company
and American Commercial Finance Corp. (7)
10.12 Cycomm International Inc. 1997 Stock Option Plan (7)
10.13 Stock Purchase Agreement and Certificate of
Designation of Series B Convertible Redeemable
Preferred Stock (7)
21.1 Subsidiaries of the Registrant ___
27 Financial Data Schedule ___
</TABLE>
(1) Previously filed as an Exhibit to Form 20-F Registration Statement (as
amended), Form 20-F Annual Reports and Form 6-K Reports of Foreign Issuer
and incorporated by reference herein.
(2) Previously filed as an Exhibit to Form F-1 Registration Statement filed
on May 9, 1995 and incorporated by reference herein.
(3) Previously filed as an Exhibit to Form 8-K dated March 21, 1996 and
incorporated by reference herein.
(4) Previously filed as an Exhibit to Form 8-K dated June 21, 1996
and incorporated by reference herein.
(5) Previously filed as an Exhibit to Form 10-KSB for the year ended May 31,
1996 dated September 12, 1996 and incorporated by reference herein.
(6) Previously files as an Exhibit to form 10-KSB for the seven months
ended December 31, 1996 dated April 11, 1997 and incorporated by reference
herein.
(7) Previously filed as an Exhibit to Form 10-KSB for the year ended December
31, 1997 dated March 31, 1998 and incorporated by reference herein.
<PAGE>
Page 27
(b) Reports on Form 8-K:
1. Current Report on Form 8-K was filed on February 4, 1999
reporting the decision by the American Stock Exchange to delist
the Company's common stock under Item 5. - Other Items.
<PAGE>
Page 28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: April 29, 1999 By: /s/ Albert I. Hawk
----------------
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s Robert M. Hutton
-------------------
Robert M. Hutton
Vice President of Finance
(Principal Accounting Officer)
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/ Albert I. Hawk April 29, 1999
Albert I. Hawk, President and
Chief Executive Officer
By: /s/ Hubert Marleau April 29, 1999
Hubert Marleau, Director
By: /s/ Ret. Gen. Thomas A. Stafford April 29, 1999
Ret. Gen. Thomas A. Stafford, Director
<PAGE>
Page 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCOMM INTERNATIONAL INC.
Date: April __, 1999 By:_________________________
Albert I. Hawk
President and
Chief Executive Officer
(Principal Executive Officer)
By:_________________________
Robert M. Hutton
Vice President of Finance
(Principal Accounting Officer)
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: April __, 1999
Albert I. Hawk, President and
Chief Executive Officer
By: April __, 1999
Hubert Marleau, Director
By: April __, 1999
Ret. Gen. Thomas A. Stafford, Director
<PAGE>
F-1
Cycomm International Inc. and Subsidiaries
Index to Consolidated Financial Statements
For the Year Ended December 31, 1998,
and the Year Ended December 31, 1997
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Statements of Operations F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
<PAGE>
F-2
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Cycomm International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Cycomm International Inc. and subsidiaries as of December 31, 1998 and
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998
and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Cycomm International Inc. and subsidiaries at December 31,
1998 and December 31, 1997 and the consolidated results of their
operations and their cash flows for the years ended December 31, 1998 and
December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company
has incurred recurring losses from operations and has an accumulated
deficit that raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Vienna, Virginia
April 23, 1999 /s/ Ernst & Young LLP
<PAGE>
F-3
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Year ended Year ended
December 31, December 31,
1998 1997
<S> <C> <C>
Sales $18,991,587 $15,678,667
Cost of sales 15,181,857 11,257,321
---------- ----------
Gross profit 3,809,730 4,421,346
---------- ----------
Expenses:
Selling, general and administrative 7,691,052 6,653,643
Research and product development 1,695,208 1,307,720
Depreciation and amortization 2,105,116 1,050,998
Foreign exchange (gain) loss (174,071) 658
Other 84,543 --
---------- ----------
11,401,848 9,013,019
---------- ----------
Loss from Operations (7,592,118) (4,591,673)
---------- ----------
Other Income (Expense)
Interest income 72,626 55,046
Interest expense (778,065) (946,235)
Realized gain (loss) on investments --- 38,825
Other income 1,508 21,385
---------- ----------
(703,931) (830,979)
---------- ----------
Net Loss $(8,296,049) $(5,422,652)
=========== ===========
Beneficial return on preferred stock (150,000) ---
----------- -----------
Net loss attributable to common shareholders $(8,446,049) $(5,422,652)
=========== ===========
Net loss per share
$(0.78) $(0.59)
====== ======
Weighted average number of common
shares outstanding 10,835,688 9,168,335
========== =========
</TABLE>
(See accompanying notes)
<PAGE>
F-4
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, December 31,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $710,421 $617,636
Accounts receivable, less allowance for doubtful
accounts of $61,000 and $41,000, respectively 2,491,760 5,171,402
Inventories 3,729,846 5,374,511
Prepaid expenses 102,502 96,029
------- ------
Total current assets 7,034,529 11,259,578
Fixed assets, net 1,474,390 1,582,475
Goodwill, net of accumulated amortization of
$2,115,907 and $1,676,574, respectively 2,175,400 2,534,733
Other assets:
Notes receivable - affiliates 68,912 183,185
Deferred financing costs, net of accumulated
amortization of $407,978 and $234,878, respectively 31,701 179,460
Unearned discount --- 13,889
Other 227,285 197,956
----------- -----------
Total assets $11,012,217 $15,951,276
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $2,266,587 $3,705,146
Accrued liabilities 1,573,630 1,481,427
Deferred revenue 934,948 ---
Dividends payable on preferred stock 33,333 ---
Current portion of capital lease obligations 22,418 29,468
Revolving credit facility 2,310,890 2,629,308
Current portion of notes payable and convertible
debentures 3,394,425 808,000
--------- -------
Total current liabilities 10,536,231 8,653,349
Capital lease obligations, less current portion 42,015 54,294
Notes payable and convertible debentures,
less current portion --- 3,000,000
Stockholders' equity:
Preferred stock, $50,000 par value, unlimited authroized
shares, 8 shares issued and outstanding at December
31, 1998 360,000 ---
Common stock, no par value, unlimited authorized
shares,12,210,311 and 9,816,877 shares issued and
outstanding at December 31, 1998 and
December 31, 1997,respectively 51,674,618 47,491,611
Accumulated deficit (51,600,647) (43,247,978)
----------- -----------
Total stockholders' equity 433,971 4,243,633
----------- -----------
Total liabilities and stockholder's equity $11,012,217 $15,951,276
=========== ===========
</TABLE>
(See accompanying notes)
<PAGE>
F-5
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended Year Ended
December 31, December 31,
1998 1997
Operating activities
<S> <C> <C>
Net loss $(8,296,049) $(5,422,652)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,105,116 1,050,998
Realized gain on marketable securities --- (38,825)
Write-down of inventories to net realizable value 654,494 ---
Non-cash expenses 463,889 533,081
Deferred technology costs 6,502 43,725
Change in operating assets and liabilities 2,381,730 (1,114,188)
---------- ----------
Cash used in operating activities (2,684,318) (4,947,861)
---------- ----------
Investing activities
Increase in long-term investments --- (106,500)
Decrease in long-term investments --- 513,500
Acquisition of fixed assets (327,696) (473,449)
Proceeds on disposal of fixed assets --- 127,086
Increase in notes receivable (66,000) (184,000)
Decrease in notes receivable 50,249 49,167
Other (133,879) (120,191)
-------- --------
Cash used in investing activities (477,326) (194,387)
-------- --------
Financing activities
Issuance of common stock, net of issuance costs 2,895,750 180,000
Issuance of preferred stock, net of issuance costs 900,000 ---
Net borrowings under revolving credit facilities (318,417) 2,058,375
Repayment of notes payable and convertible debentures (173,575) (329,401)
Borrowings under convertible debentures --- 3,000,000
Deferred financing costs on convertible debentures (30,000) (300,000)
Repayment of obligations under capital leases (19,329) (69,634)
--------- ---------
Cash provided by financing activities 3,254,429 4,539,340
========= =========
Increase (decrease) in cash and cash equivalents
during the year 92,785 (602,908)
Cash and cash equivalents, beginning of year 617,636 1,220,544
-------- ---------
Cash and cash equivalents, end of year $710,421 $617,636
======== ========
</TABLE>
(See accompanying notes)
<PAGE>
F-6
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Preferred Preferred Common Common Accumulated
Shares Stock Shares Stock Deficit
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 --- $ --- 8,050,401 $42,970,749 $(37,825,326)
--------- --------- --------- ----------- ------------
Net Loss (5,422,652)
Issuance of common stock:
Conversion of debentures --- --- 1,219,727 2,742,753 ---
Private placement -
common stock 120,000 180,000 ---
Acquisition earn-out --- --- 426,749 1,264,776 ---
Beneficial conversion feature
of convertible debt --- --- --- 333,333 ---
--------- --------- --------- ----------- ------------
Balance, December 31, 1997 --- --- 9,816,877 47,491,611 (43,247,978)
========= ========= ========= ========== ===========
Net Loss (8,296,049)
Issuance of common stock:
Conversion of debentures --- --- 236,380 273,970 ---
Private placement -
common stock --- --- 1,870,000 2,895,750 ---
Value of options issued to
non-employees --- --- --- 450,000 ---
Issuance of preferred stock:
Private placement -
preferred stock 20 900,000 --- --- ---
Conversion of preferred stock (12) (540,000) 287,054 563,287 ---
Dividends on preferred stock (56,620)
--------- --------- ---------- ----------- ------------
Balance, December 31, 1998 $8 $ 360,000 12,210,311 $51,674,61 $(51,600,647)
========== ========== ========== ========== ============
</TABLE>
(See accompanying notes)
<PAGE>
F-7
CYCOMM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Cycomm International Inc. (the "Company") is a manufacturer of value
added, secure, ruggedized computer equipment and communications systems,
and a provider of related services. The Company is based in McLean,
Virginia, with wholly-owned subsidiaries in Montreal, Quebec, Sebastian,
Florida and Albuquerque, New Mexico.
The Company's consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. The Company incurred a net loss of $8,296,049 for the year
ended December 31, 1998 and as of that date had an accumulated deficit of
$51,600,647. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Management is addressing the going concern issue with several actions
including streamlining operations, implementing programs to grow revenue,
evaluating potential sales or dispositions of business segments, and
further capitalizing the Company through private equity placements. In the
event that one or more of these transactions are not completed or are unable
to be completed on terms acceptable to managment, the Company will
consider further cost cutting measures, including the discontinuation of
certain business segments, sale of assets or protection under Federal
bankruptcy laws.
Cycomm's PCMobile product line has shown continued growth and management
believes that the PCMobile product line can achieve the revenue levels
necessary to fund operations from working capital. The secure products
line had declining revenue and an increased net loss in 1998. Management
does not believe that the secure computing division will be able to fund
its operations from working capital in 1999. Management is exploring
options for the secure computing division including the sale or
disposition of the segment. Cost reductions have been made in the
communications security product segment, which enabled the segment to fund
the majority of its own working capital requirements from operations for
the year ended December 31, 1998. Management is also considering the sale
of its Val-Comm subsidiary, which comprises most of the communications
security segment.
Cycomm has historically been able to raise capital through private equity
placements. However, on January 21, 1999, Cycomm was notified by the
American Stock Exchange (AMEX) that it no longer met continued listing
criteria and would be delisted from the exchange. The delisting will
become effective on April 30, 1999. The Company intends to begin trading
on the Over-the-Counter Bulletin Board (OTCBB) immediately following the
delisting from the AMEX. The delisting of the Company's stock from the
AMEX and the lack of an established trading pattern on the OTCBB could
adversely affect the Company's ability to raise additional capital.
The Company also funds its operations through borrowings on its secured
line of credit. The line of credit is comprised of a $3,432,000 revolving
loan and a $568,000 term loan, and is collateralized by the Company's
accounts receivable, inventory and various machinery. The line of credit
is a demand facility, which is callable by the lender.
These consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to
continue as a going concern and therefore be required to realize its
assets and discharge its liabilities in other than the normal course of
business and at amounts different from those reflected in the accompanying
consolidated financial statements.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of inter-company
accounts and transactions.
Cash and Cash Equivalents
The Company considers all short-term deposits with a maturity of three
months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Market is determined by the
<PAGE>
F-8
replacement cost method for raw materials and the net realizable value
method for work in process and sub-assemblies and finished goods.
Inventories also include certain capitalized project costs and
demonstration equipment which are stated at amortized cost, which
approximates net realizable value.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable,
accrued liabilities, capital lease obligations, notes payable and
convertible debentures approximate their fair values.
Fixed Assets and Depreciation
Fixed assets are carried at the lower of cost or market less accumulated
depreciation and amortization. Depreciation is calculated on a straight
line basis over the estimated useful lives of the fixed assets as follows:
<TABLE>
<S> <C>
Equipment under capital lease Term of the respective lease
Furniture and fixtures 5 to 7 years
Research equipment 3 to 10 years
Computer equipment 3 to 7 years
Marketing equipment 2 to 7 years
Office equipment 5 to 7 years
Manufacturing equipment 3 to 7 years
</TABLE>
Amortization of leasehold improvements is calculated on a straight line
basis over the term of the respective lease.
Research and Product Development Costs
Research and product development costs are expensed as incurred.
Deferred Financing Costs
Costs relating to obtaining debt financing are deferred and amortized on a
straight line basis over the term of the debt. The unamortized portion of
the deferred financing costs related to convertible debentures is recorded
against stockholders' equity at the time of conversion.
Leases
Fixed assets acquired under leases which transfer substantially all of the
benefits of ownership to the lessee are recorded as the acquisition of
assets and the assumption of a related obligation. Under this method,
assets are depreciated over their expected useful lives, and obligations,
including interest thereon, are extinguished over the life of the lease.
All other leases are accounted for as operating leases wherein rental
payments are charged to operations as incurred.
Revenue Recognition
Product sales, less estimated returns and allowances, are recorded at the
time of shipment.
Product Warranty
Warranties of twelve months from date of sale are provided for most
products sold, with limited lifetime warranties on certain components. A
reserve is established to cover estimated warranty costs during this
period. Warranty reserves for the years ended December 31, 1998 and 1997
were $250,155 and $144,544 respectively.
<PAGE>
F-9
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with generally accepted accounting principles.
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues,
costs and expenses are translated at the average rates of exchange
prevailing during the year. Translation adjustments resulting from this
process are shown separately in stockholders' equity. Exchange
adjustments from foreign currency transactions are recognized in income.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which was required to be adopted
on December 31, 1997. Under the new standard, companies are required to
report basic earnings per share (EPS) and diluted EPS, instead of the
primary and fully diluted earning EPS disclosures which were previously
required. Basic EPS is calculated by dividing net earnings by the weighted
average number of common shares outstanding during the year. Diluted EPS
is calculated by dividing net earnings by the weighted average number of
common shares outstanding during the year plus the incremental shares that
would have been outstanding upon the assumed exercise of eligible stock
options, warrants and the conversion of certain debenture issues. Included
in EPS is a charge of $150,000 related to the beneficial conversion
feature of the Company's convertible preferred stock during 1998. For the
periods ended December 31, 1998 and December 31, 1997, the effect of the
exercise of stock options, warrants and the conversion of preferred stock
and debentures would be anti-dilutive, and therefore, diluted earnings (loss)
per share is equal to basic earnings (loss) per share as disclosed in the
consolidated statements of operations.
Goodwill
Goodwill is amortized on a straight line basis over a period of ten years.
Cycomm continually evaluates whether events or circumstances have occurred
that indicate that the remaining useful life of goodwill may warrant
revision or that the remaining balance may be unrecoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the
Company assesses the impairment in accordance with Statement of Financial
Statements No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of ("SFAS 121"). SFAS 121 requires
impairment losses to be recognized for long-lived assets when indicators
of impairment are present and the undiscounted cash flows, excluding
interest, of the related business activities. The impairment loss of
goodwill is measured by comparing the carrying amount of the asset to its
fair value with any excess of carrying value over fair value written off.
Fair value is based on market prices where available, an estimate of
market value, or determined by various valuation techniques including
discounted cash flow.
Reclassification
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1998 presentation.
NOTE 3: ACQUISITION EARN-OUT
XL Computing (Canada) Inc.
In connection with the purchase price paid for the Company's acquisition
of its Cycomm Mobile Solutions subsidiary, the Company entered into an
acquisition earn-out agreement with the seller, M3i Technologies Inc. and
M3i Systems Inc. (collectively the "Seller"). The earn-out provision of
the purchase price was to be paid in Cycomm common stock, up to a maximum
value of $4,000,000, subject to provisions based on the achievement of
certain unit sales volumes for a five year period. Common stock issued
under the earn-out provisions was to be issued at the average current
market price of the last month for the quarter in which it was earned.
As of December 31, 1998, Cycomm had paid $1,354,796 of contingent
consideration, which was paid in 444,862 shares of common stock. Cycomm
has accrued an additional liability of $700,000 related to the earn-out
obligation, however payment of this amount is contingent upon the outcome
of the lawsuit described in the paragraph below. No contingent
consideration was paid by Cycomm in 1998.
The Company is currently involved in a lawsuit with the Seller regarding
the amount of earn-out consideration due. The Company believes that
eligible units in the earn-out calculation include all PCMobile units
which are substantially the same as the units manufactured by M3i
Technologies at the time of the acquisition: 486 75mhz processors with
monochrome screens. M3i believes that earn-out should be calculated on
<PAGE>
F-10
all units sold, including the subsequent generations of PCMobile
computers: the 586 133mhz color screen units, and the Pentium 233mhz color
screen units. If the asset purchase agreement is interpreted to use M3i's
method of calculation, Cycomm would be obligated to issue M3i
approximately $1.5 million of Cycomm common stock. This would have no
income statement effect for Cycomm, but it would increase the Company's
goodwill related to the transaction and increase the common stock
outstanding. The Company has recorded the full amount of earn-out based on
its interpretation of the Asset Purchase Agreement.
The Company intends to settle this lawsuit with the plaintiff. See Note
18 of the financial statements for a further discussion of the terms of
the settlement.
NOTE 4: INVENTORIES
Inventories by categories are as follows:
<TABLE>
December 31, December 31,
1998 1997
<S> <C> <C>
Raw materials $1,850,393 $1,988,897
Work in process and sub-assemblies 1,576,513 2,591,442
Finished goods 302,940 794,172
---------- ----------
$3,729,846 $5,374,511
========== ==========
</TABLE>
Cycomm continually evaluates inventory for obsolescence or impairment in
value. The impairment loss is measured by comparing the carrying amount
of the inventory to its fair value with any excess of carrying value over
fair value written off. Fair value is based on market prices where
available, or on an estimate of market value or determined by various
valuation techniques including discounted cash flow.
NOTE 5: FIXED ASSETS
Fixed assets and accumulated depreciation and amortization by categories
are as follows:
<TABLE>
Accumulated
depreciation and Net book
Cost Amortization value
December 31, 1998
<S> <C> <C> <C>
Land $ 48,000 $ --- $ 48,000
Equipment under capital leases 36,847 23,360 13,487
Furniture and fixtures 63,363 26,210 37,153
Research equipment 435,663 155,802 279,861
Computer equipment 600,745 200,702 400,043
Office equipment 169,897 123,770 46,127
Manufacturing equipment 1,048,362 499,465 548,897
Leasehold improvements 142,002 41,180 100,822
---------- ---------- ----------
$2,544,879 $1,070,489 $1,474,390
========== ========== ==========
December 31, 1997
Land $ 48,000 $ --- $ 48,000
Equipment under capital leases 121,328 60,379 60,949
Furniture and fixtures 41,467 18,623 22,844
Research equipment 490,586 110,566 380,020
Computer equipment 400,053 99,994 300,059
Office equipment 165,926 99,885 66,041
Manufacturing equipment 926,783 274,532 652,251
Leasehold improvements 66,498 14,187 52,311
---------- ---------- ----------
$2,260,641 $ 678,166 $1,582,475
========== ========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 was
$435,779 and $636,702, respectively.
<PAGE>
F-11
Cycomm continually evaluates whether events or circumstances have occurred
that indicate that the remaining useful life of fixed assets may warrant
revision or that the remaining balance may be unrecoverable. When factors
indicate that fixed assets should be evaluated for possible impairment,
the Company assesses the impairment in accordance with Statement of
Financial Statements No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"). SFAS 121
requires impairment losses to be recognized for long-lived assets when
indicators of impairment are present and the undiscounted cash flows,
excluding interest, of the related business activities. The impairment
loss of fixed assets is measured by comparing the carrying amount of the
asset to its fair value with any excess of carrying value over fair value
written off. Fair value is based on market prices where available, an
estimate of market value, or determined by various valuation techniques
including discounted cash flow.
NOTE 6: NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures are as follows:
<TABLE>
<S> <C> <C>
December 31, December 31,
1998 1997
10% convertible debentures, due February 28, 1999 $3,000,000 $3,000,000
Revolving credit facility, prime + 3% 2,310,890 2,629,308
Term note payable, prime + 3%, due January 1, 2001 394,425 568,000
10% convertible debentures, due June 11, 1998 --- 200,000
10% convertible debentures, due May 29, 1998 --- 40,000
--------- ---------
Less current portion 5,705,315 6,437,308
5,705,315 3,437,308
--------- ---------
$ --- $3,000,000
========== ==========
</TABLE>
As of December 31, 1998, all of Cycomm's notes payable and convertible
debentures are current liabilities.
On February 28, 1997, the Company issued $3,000,000 of 10% convertible
debentures due February 28, 1999 which were convertible at the option of
the holders into common stock of the Company at a 10% discount of the
average closing bid price of the Company's common stock prior to
conversion provided, the conversion price was not greater than $6.00 per
share nor less than $3.00 per share. On June 15, 1998, the Company
entered into an agreement with the holders of these debentures, under
which the holders agreed to waive their conversion rights in exchange for
an increase in the interest rate of the debentures from 10% to 12%. See
Note 18 for further discussion of the $3,000,000 convertible debentures.
The Company obtained a revolving credit facility from a lender under which
the Company may, at its option, borrow and repay amounts up to a maximum
of $3,432,000, of which $2,310,890 was outstanding at December 31, 1998.
Borrowings under this credit facility bear interest at prime plus 3%. The
credit facility is collateralized by trade accounts receivable and
inventory and restricts the Company from paying dividends in certain
circumstances. In conjunction with this credit facility, the Company
obtained a term loan in the amount of $568,000 collateralized by certain
machinery and equipment. This term loan bears interest at prime plus 3%
and is payable in equal installments of $15,777 per month through January
1, 2001. As of December 31, 1998, the outstanding balance of the term
loan was $394,425.
On June 11, 1996, the Company issued $1,500,000 of 10% convertible
debentures due June 11, 1998 which were convertible at the option of the
holders into common stock of the Company at the lesser of $5.34 per share
or a range of 79% to 85% of the average closing bid price of the Company's
common stock prior to conversion. The debentures were fully eligible for
conversion after October 9, 1996. During the year ended December 31,
1998, principal and accrued interest in an amount of $232,192 were
converted into 197,686 shares of common stock. During the year ended
December 31, 1997, principal and accrued interest in an amount of $162,425
were converted into 79,006 shares of common stock.
<PAGE>
F-12
On May 29, 1996, the Company issued $475,000 of 10% convertible debentures
due May 29, 1998 which were convertible at the option of the holders into
common stock of the Company at the lesser of $6.00 per share or a range of
80% to 82% of the average closing bid price of the Company's common stock
prior to conversion. The debentures were fully eligible for conversion
after September 2, 1996. During the year ended December 31, 1998,
principal and accrued interest in an amount of $46,433 were converted into
38,694 share of common stock. During the year ended December 31, 1997,
principal and accrued interest in an amount of $259,912 were converted
into 142,674 shares of common stock.
NOTE 7: DEFERRED REVENUE
The Company has recorded deferred revenue of $934,948 for the period ended
December 31, 1998. Deferred revenue was recorded as a result of certain
sales of PCMobile computers in which customers were shipped PCMobiles with
586 processors (the "586s") to be used until PCMobiles with Pentium
processors (the "Pentiums") became available. At the time the shipments
were made, Cycomm was still in the process of developing the Pentium
PCMobile, however the customers agreed to take 586s until Cycomm was able
to deliver Pentiums. The customers paid the full price for Pentiums at the
time of the shipment which was recorded as deferred revenue. When the
Pentiums became available, the customers could trade in the 586s for Pentiums
at no additional charge.
The customers retain the right to return the 586s at any time before they
receive the Pentiums. Upon the return of the 586s, the customers would
be entitled to a full refund, and the entire sale would be cancelled.
The 586s have been classified as demonstration units, which are recorded
in inventory, and are depreciated over a one year period. Revenue on the
sales will be recognized when the Pentium units are shipped to the customers.
NOTE 8: COMMITMENTS
Lease Commitments
The Company leases equipment, included in fixed assets, under leases which
are classified as capital leases. Total payments under these capital
leases are due in monthly installments including imputed interest from
7.8% to 12.67% through December 31, 2003. The Company occupies office
space at various locations under non-cancellable operating leases.
Certain leases contain escalation clauses and require the Company to pay
its share of any increase in operation expenses and real estate tax.
Future minimum lease payments under the Company's capital and
non-cancellable operating leases are as follows:
<TABLE>
<S> <C> <C>
Capital Operating
Year ending December 31, Leases Leases
1999 $22,418 $466,291
2000 19,134 383,011
2001 19,134 143,094
2002 11,722 ---
2003 1,332 ---
- ---- ------- --------
73,740 $992,396
========
Less: amount representing interest on capital leases (9,307)
-------
Present value of future minimum capital lease payments $64,433
=======
</TABLE>
Long-term interest on capital leases amounted to $4,978 and $9,307 for the
years ended December 31, 1998 and December 31, 1997, respectively. Total
rental expense under the various operating leases amounted to $501,274 and
$623,010 for the year ended December 31, 1998 and December 31, 1997,
respectively.
<PAGE>
F-13
NOTE 9: CAPITAL STOCK
Authorized Capital
The authorized capital of the Company consists of an unlimited number of
common shares without par value and an unlimited number of preferred
shares without par value, issuable in series.
Common Stock
The issued common stock of the Company consisted of 12,210,311 and
9,816,877 shares as of December 31, 1998 and December 31, 1997,
respectively. Basic loss per share is calculated based on the weighted
average number of common shares outstanding during each period. Diluted
net loss per share was equal to basic loss per share in each of the
periods presented as the effect of potentially dilutive securities was
anitdilutive.
The Company raised additional capital during the year ended December 31,
1998 through 5 separate private equity placements of its common stock.
The stock was issued at a discount to the market price on the date of the
issuance. In total, the Company issued 1,870,000 shares of common stock
for gross proceeds of $3,685,000. Cash proceeds, after commissions and
issue costs were $2,895,750. In conjuction with these private placements,
the Company issued 370,000 warrants with fair value on the date of issuance
of approximately $592,000.
For the year ended December 31, 1997, the Company issued 120,000 shares of
its common stock in a single equity placement for gross proceeds of
$200,000. Net proceeds, after commissions and issue costs were $180,000.
During the twelve months ended December 31, 1998, convertible debentures
and accrued interest thereon were converted into 236,380 shares of common
stock and convertible preferred shares and related accrued dividends were
converted into 287,054 shares of common stock. During the twelve months
ended December 31, 1997, convertible debentures and accrued interest
thereon were converted into 1,219,727 shares of common stock.
Preferred Stock
In February 1998, Cycomm issued 20 shares of Series B convertible
redeemable preferred stock ("Series B preferred stock") with a conversion
value of $50,000 per share for net proceeds of $900,000. The Series B
preferred stock is convertible at the option of the holder into common
stock pursuant to a conversion schedule as set forth in the agreement. The
holder can convert 25% of its preferred shares on or after the 90th day
after February 26, 1998, and up to a further 25% every 30 days
thereafter. The conversion price is the lesser of $2.38, or a 15%
discount of the five-day average closing bid price prior to the date of
conversion. In the event that Cycomm's common stock is trading at or
below $1.50 per share at the conversion date, Cycomm has the right to
redeem the preferred shares at a premium of 18% over the conversion
price. If Cycomm does not exercise this right, the holder may convert 10%
of its preferred shares, and up to a further 10% every 20 days
thereafter. As of December 31, 1998, 12 shares of Series B preferred
stock had been converted into 287,054 shares of common stock, and 8 shares
of Series B preferred stock were outstanding.
NOTE 10: STOCK OPTIONS AND WARRANTS
Stock Options
The Company has historically granted non-qualified stock options to
directors, officers, employees and other parties which generally become
exercisable immediately and have expiration terms ranging from two to five
years. The options are granted at an exercise price that equals the fair
market value on the date each option is granted.
In November 1997, the Company adopted the 1997 Stock Option Plan ("1997
Plan") under which a maximum aggregate of 1,000,000 shares were reserved
for grant to all eligible employees of the Company. The stock options
granted under the 1997 Plan are exercisable at the fair market value of
the common stock on the date of grant with 25% vesting on each of the four
successive anniversary dates from the date of grant. The stock options
have a term of ten years. For the years ended December 31, 1998 and
December 31, 1997, a total of 230,000 and 240,000 stock options under the
1997 Plan were granted. As of December 31, 1998, 530,000 options are
available under the 1997 Plan.
<PAGE>
F-14
The following table summarizes the activity in common shares subject to
options for the relevant periods ended December 31, 1997:
<TABLE>
Shares Option
Price Range
<S> <C> <C>
Balance, December 31, 1996 1,401,500 $3.00 - $10.95
Granted 1,395,000 $2.00 - $3.31
Exercised --- ---
Terminated (344,000) $3.50 - $10.95
---------
Balance, December 31, 1997 2,452,500 $2.00 - $8.10
---------
Granted 1,405,000 $1.88 - $2.50
Exercised --- ---
Terminated (387,500) $2.50 - $4.05
---------
Balance, December 31, 1998 3,470,000 $1.88 - $8.10
=========
</TABLE>
Options were exercisable with respect to 2,210,000 shares at December 31,
1998. The weighted average contractual life of options outstanding
as of December 31, 1998 was 3.95 years. The weighted average exercise
price of options exercisable at December 31, 1998 was $3.02.
The Company adopted Financial Accounting Standard No. 123 entitled
"Accounting for Stock-Based Compensation" ("FAS 123") as of June 1, 1995. The
provisions of FAS 123 allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose
the pro forma effects on net income and earnings per share had the value
of the options been expensed. The Company has elected to continue its
practice of recognizing compensation expense for its stock option and
warrant incentive plans under Accounting Principles Board Statement No,
25 ("APB 25"), and to provide the required pro forma information for stock
options and warrants granted after June 1, 1995. Under APB 25, compensation
cost is the excess, if any, of the quoted market price of the stock at the
grant date, or other measurement date, over the exercise price. Had
compensation expense for the Company's stock options and warrants granted
after June 1, 1995 been determined based on the fair value at the grant
dates for awards under those plans, the Company's pro forma net loss
and net loss per share for the reported periods would have been as
follows:
<TABLE>
Year Ended Year Ended
December 31, December 31,
1998 1997
<S> <C> <C>
Net loss attributable to
common shareholders $(8,446,049) $(5,422,652)
Compensation expense (117,292) (1,130,679)
---------- ----------
Pro forma net loss $(8,563,341) $(6,553,331)
=========== ===========
Pro forma loss per share $(0.79) $(0.71)
====== ======
</TABLE>
The effects on pro forma net loss per share of expensing the estimated
fair value of stock options and warrants are not necessarily
representative of the effects on reported net income for future years due
to such things as the vesting period of the stock options and warrants and
the potential for issuance of additional stock options and warrants in
future years.
The fair value of options and warrants granted after June 1, 1995, used as
a basis for the above pro forma disclosures, was estimated at the date of
grant using the Black-Scholes option pricing model. The option and
warrant pricing assumptions include a dividend yield of 0%; an expected
volatility of .809; a risk free interest rate of 6.30%; and an expected
life of half the period from grant to expiration.
For the year ended December 31, 1998, the Company recognized
$450,000 in expense related to stock options issued to non-employees.
<PAGE>
F-15
The weighted average fair values and exercise prices are as follows:
<TABLE>
Year Ended Year Ended
December 31, December 31,
1998 1997
<S> <C> <C>
Weighted-average
fair value per $1.48 $1.53
option granted
Weighted-average
exercise price per $2.20 $2.34
option granted
</TABLE>
Common Share Purchase Warrants
The Company has granted common share purchase warrants to directors,
officers and other parties which become exercisable immediately and have
expiration terms ranging from one year to five years. The warrants are
generally granted at an exercise price that equals fair market value of
the common stock at the date each warrant is granted. However, certain
warrants are granted with an exercise price in excess of the fair market
value of the common stock at the date each warrant is granted. During the
year ended December 31, 1998, the Company issued 370,000 warrants to
purchase its common stock for services related ot the private placement of
common stock with exercise prices within a range of $2.00 to $3.00. At
December 31, 1998, the following warrants to purchase the Company's
common stock were outstanding:
<TABLE>
Exercise Expiration
Shares Price Date
<S> <C> <C>
500,000 $ 3.75 March 20, 1999
100,000 $ 5.00 May 16, 1999
281,100 $ 8.00 June 11, 1999
5,000 $ 4.75 November 30, 2000
75,000 $ 3.38 February 28, 1999
50,000 $ 2.50 February 26, 2000
50,000 $ 3.00 May 15, 1999
75,000 $ 2.50 May 15, 1999
75,000 $ 2.50 September 17, 2000
100,000 $ 2.00 November 11, 1999
20,000 $ 2.50 February 26, 2000
---------
1,331,100
=========
</TABLE>
<PAGE>
F-16
NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the relevant periods are summarized
as follows:
<TABLE>
Year ended Year ended
December 31, December 31,
1998 1997
Cash flow effects of changes in operating assets and
liabilities, net of acquisitions:
<S> <C> <C>
Accounts receivable $2,809,666 $(3,007,716)
Purchases of marketable securities --- (267,991)
Proceeds on sale of marketable securities --- 306,816
Inventories (48,675) 245,341
Prepaid expenses (6,473) (19,244)
Accounts payable - trade (1,440,347) 1,514,729
Accrued liabilities 130,828 42,262
Deferred revenue 934,948 ---
Due to affiliate 1,783 158,282
Dividends payable on preferred stock --- (86,667)
--------- ----------
$2,381,730 $(1,114,188)
========== ===========
Non-cash investing and financing activities:
Conversion of convertible debentures to common stock $278,625 $2,742,753
Conversion of preferred stock to common stock 563,287 ---
Acquisition earn-out --- 1,264,776
Cash paid during the period:
Interest paid $759,169 $370,691
Income taxes paid --- ---
</TABLE>
<PAGE>
F-17
NOTE 12: INCOME TAXES
The Company accounts for income taxes under the liability method required
by FAS Statement No. 109, "Accounting for Income Taxes". Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For consolidated
financial statement purposes, a change in valuation allowance has been
recognized to offset certain deferred tax assets for which realization is
uncertain. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1998 and 1997 are as follows:
<TABLE>
December 31, December 31,
1998 1997
Deferred tax liabilities
<S> <C> <C>
Inventory adjustment $ --- $ ---
Bad debt expense --- ---
-------- --------
Total deferred tax liabilities --- ---
-------- --------
Deferred tax assets
Non-employee stock options 175,500 ---
Book over tax depreciation and amortization 309,663 303,813
Inventory capitalization and related reserves 821,479 620,765
Net operating loss carryforward 15,073,313 12,954,863
Nondeductible expense and reserves 160,861 85,383
----------- -----------
Total deferred tax assets 16,540,816 13,964,824
Valuation allowance for deferred tax assets (16,540,816) (13,964,824)
----------- -----------
Net deferred tax asset --- ---
----------- -----------
Net deferred tax $ --- $ ---
=========== ===========
</TABLE>
There was no provision for income taxes in the year ended December 31,
1998 and the year ended December 31, 1997 as the Company incurred losses
in those years.
A reconciliation between federal statutory income tax rates and the
effective tax rate of the Company at December 31 is as follows:
<TABLE>
December 31, December 31,
1998 1997
<S> <C> <C>
US federal statutory benefit rate (35.0)% (35.0)%
Tax net operating loss carryovers 39.0 39.0
US state tax benefit, net of federal income tax effect 4.0 (4.0)
--------- ---------
Effective rate on operating loss --- ---
--------- ---------
</TABLE>
The Company has US net operating loss carryfowards available at December
31, 1998 of approximately $38.6 million for US tax purposes to offset income
in future years. These carryfowards will expire in the years 2000 through
2012, unless previously utilized. The tax attributes identified above may
be subject to limitation arising from changes of ownership over the three
year statutory testing period. The Company has Canadian net operating
loss carryforwards available at December 31, 1998 of approximately
$950,000; these carryforwards will expire in the years 2003 and 2004 if
not used.
In addition, the Company has future deductible research and development
costs for Canadian federal tax purposes of $400,000. These costs have an
indefinite carryover period.
NOTE 13: RELATED PARTY TRANSACTIONS
In April 1997, the Company loaned certain officers, directors and
employees an aggregate of $184,000 in order to purchase 92,000 shares of
the Company's common stock in a private transaction. At December 31,
1998, amounts outstanding under these loans total $128,684 in principal
and $12,698 in accrued interest receivable. The loans are secured by the
common stock, bear interest at 5.9% and are due April 30, 2000. The loans
were made when the Company's share price was $2.00 per share. As of April
15, 1999 the Company's share price was $0.63 per share. For the year
<PAGE>
F-18
ended December 31, 1998, Cycomm has taken a reserve of $88,470 related to
the impairment of the loan collateral.
The Company retained the consulting services of Corstone Corporation,
which previously employed the current Chief Executive Officer and former
Chief Financial Officer. The current Chief Executive Office and former
Chief Financial Officer have no direct or indirect ownership interest in
Corstone Corporation. These consulting services included financial, legal
and administrative services. No consulting fees were paid to Corstone for
the year ended December 31, 1998. Consulting fees paid to Corstone for
the year ended December 31, 1997 were $26,750.
NOTE 14: SEGMENT AND RELATED INFORMATION
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which changes the way in which the
Company reports information about its operating segments. The information
for 1997 has been restated from the prior year's presentation in order to
conform to the 1998 presentation.
Cycomm's three business segments have separate management teams and
infrastructures that offer different products and services. The segments
are described below.
Mobile Computing: This segment manufactures the PCMobile product, a
ruggedized laptop computer designed to function in environments such as
extreme weather, shock, moisture and vibration. The PCMobile is sold
primarily to police and fire departments for use in their vehicles.
Secure Computing: The Secure Computing segment sells computers to the U.S.
government and to governments of other NATO countries to be used by
agencies that deal with top secret and other sensitive information. Secure
computers protect against data interception by eliminating the
electromagnetic signals which are produced by normal computer systems
Communications Security: The Communications Security segment engineers and
develops custom communications equipment for classified U.S. government
agencies. Historically, this segment also manufactured scrambling and
encryption devices to be used with cellular phones to prevent
eavesdropping from third parties. Cycomm no longer manufactures the
cellular phone scrambling and encryption devices, but the Company intends
to license the technology to other manufacturers.
In the Industry Segment Data table, the Company also breaks out Cycomm's
"Corporate" costs. Corporate costs are related to the operation of the
Company's executive office, and include executive salaries, shareholder
relations costs, interest expenses, legal and accounting costs, and
depreciation and amortization costs.
<PAGE>
F-19
The following tables, present financial information by industry segment
and geographic region.
<TABLE>
Industry Segment Data December 31, December 31,
1998 1997
----------- ------------
Sales
<S> <C> <C>
Mobile Computing $13,154,871 $8,064,465
Secure Computing 4,348,376 5,787,487
Communications security 1,488,340 1,826,715
----------- -----------
$18,991,587 $15,678,667
=========== ===========
Loss from Operations
Mobile Computing $1,928,734 $261,655
Secure Computing 3,602,001 2,250,819
Communications Security 26,065 225,419
Corporate 2,035,318 1,853,780
---------- ----------
$7,592,118 $4,591,673
========== ==========
Identifiable Assets
Mobile Computing $6,386,522 $6,017,684
Secure Computing 3,199,363 6,331,510
Communications Security 462,969 819,104
Corporate 963,363 2,782,978
----------- -----------
$11,012,217 $15,951,276
=========== ===========
Depreciation and Amortization
Mobile Computing $1,286,995 $302,280
Secure Computing 604,651 235,651
Communications Security 28,972 37,683
Corporate 184,498 475,384
---------- ----------
$2,105,116 $1,050,998
========== ==========
Capital Expenditures
Mobile Computing $129,313 $146,889
Secure Computing 116,818 273,237
Communications Security 78,011 7,326
Corporate 3,554 45,997
-------- --------
$327,696 $473,449
======== ========
Geographic Region Data December 31, December 31,
1998 1997
----------- -----------
Sales
United States $18,501,016 $12,583,557
Canada 490,571 3,095,110
----------- -----------
$18,991,587 $15,678,667
=========== ===========
Loss from Operations
United States $7,214,187 $ 3,999,957
Canada 377,931 591,716
---------- -----------
$7,592,118 $ 4,591,673
========== ===========
Identifiable Assets
United States $4,625,695 $ 9,933,593
Canada 6,386,522 6,017,683
----------- -----------
$11,012,217 $15,951,276
=========== ===========
</TABLE>
Included in United States sales are export sales of $1,566,617 and
$3,986,814 for the year ended December 31, 1998 and the year ended
December 31, 1997, respectively.
NOTE 15: MAJOR CUSTOMERS
The Company is not dependent upon any single customer that purchases its
products. However, sales to two major customers in the mobile computing
segment comprise of 16% and 15%, respectively of consolidated sales for
the year ended December 31, 1998. Sales to two major customers comprise
9% and 9%, respectively, of consolidated sales for the year ended
December 31, 1997.
<PAGE>
F-20
NOTE 16: CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally trade receivables.
Concentration of credit risk with respect to trade receivables exists at
year end as approximately $700,000 or 28% of the outstanding accounts
receivable related one to customer. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses which, when realized, have been within the range of management's
expectations.
NOTE 17: EMPLOYEE 401(K) PLAN
The Company maintains an employee 401(k) plan. The plan, which covers all
permanent U.S. employees 21 years of age or older, stipulates that
participating employees may elect to contribute up to 20% of their total
compensation to the plan, not to exceed the maximum amount allowable by
Internal Revenue Service regulations. The Company matches these
contributions in an amount up to 3% of the employee's salary.
Participant's contributions vest immediately and Company contributions vest
over a six year period. Company contributions to the plan charged to
operations for the year ended December 31, 1998 and the year ended
December 31, 1997, totalled $93,967 and $77,030.
NOTE 18: SUBSEQUENT EVENTS
On January 21, 1999, Cycomm was notified by the American Stock Exchange
that it no longer met continued listing criteria and would be delisted.
Specifically, Cycomm had incurred losses in its last five fiscal years and
therefore failed to meet the American Stock Exchange listing requirement
of pre-tax income of at least $750,000 in its last fiscal year, or in two
of its last three fiscal years. Additionally, Cycomm failed to satisfy
the minimum stockholders' equity requirement of $4 million. Trading of
Cycomm's stock was halted on April 13, 1999 and Cycomm will be delisted
from the AMEX on April 30, 1999. The Company intends to apply for
trading on the Over-the-Counter Bulletin Board (OTCBB) immediately
following the delisting from the AMEX.
On March 4, 1999 the Company signed a Letter of Intent for the sale of the
assets of its secure computing subsidiary, Cycomm Secure Solutions Inc. to
an investment group led by that subsidiary's current management. The
transaction is contingent upon approval by the Company's Board of Directors
and its secure lenders. Proceeds of any sale would be used to pay down a
portion of the Company's secured line of credit and to fund the Company's
working capital. For the year ended December 31, 1998, Cycomm Secure
Solutions had revenues of $4,348,376, a net loss of $4,087,890, and net
liabilities at December 31, 1998 were $4,110,122.
The Company is currently negotiating the sale of its secure telecommunications
subsidiary, Val-Comm Inc. to an investment group led by that subsidiary's
current management. The transaction is contingent upon the approval of the
Board of Directors. Proceeds of any sale would be used to fund the Company's
working capital. For the year ended December 31, 1998, Val-Comm had revenues
of $1,409,539, net income of $159,550 and net assets at December 31, 1998 were
$374,912.
On February 28, 1999, the $3,000,000 of 12% convertible debentures held by
the Company became due and payable. The holders of the debentures granted
the Company an extension of the payment date until March 31, 1999. The
Company is currently negotiating a further extension, and believes it will
be successful in extending the maturity of the debt and reducing the
interest rate of the debentures.
The Company has proposed a settlement to M3i Technologies, Inc. (M3i)
regarding the lawsuit over PCMobile earn-out calculations. M3i was
seeking over $2 million in damages, to be paid in cash. The terms of the
proposed settlement call for Cycomm to sign a promissory note for an
amount to be determined based on the date of the payment. The note will
be $700,000 if it is repaid before the first anniversary of the settlement
date, $1,100,000 if repaid before the second anniversary of the settlement
date, and $1,500,000 if repaid before the third anniversary of the
settlement date. The Company and M3I currently believe that a settlement
in this form is attainable, however, there can be no assurances that such
a settlement can be reached.
On January 19, 1999 7 shares of Series B preferred stock with principal
and accrued dividends of $381,356 were converted into 282,617 shares of
common stock.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 710,421
<SECURITIES> 0
<RECEIVABLES> 2,552,486
<ALLOWANCES> (60,726)
<INVENTORY> 3,729,846
<CURRENT-ASSETS> 7,034,529
<PP&E> 2,544,879
<DEPRECIATION> 1,070,489
<TOTAL-ASSETS> 11,012,217
<CURRENT-LIABILITIES> 10,536,231
<BONDS> 5,705,315
0
360,000
<COMMON> 51,674,618
<OTHER-SE> 0
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